Working Capital Mngmnt of Fertiliser
-
Upload
tilak-kumar-vadapalli -
Category
Documents
-
view
217 -
download
0
Transcript of Working Capital Mngmnt of Fertiliser
-
8/15/2019 Working Capital Mngmnt of Fertiliser
1/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
2/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
3/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
4/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
5/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
6/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
7/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
8/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
9/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
10/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
11/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
12/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
13/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
14/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
15/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
16/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
17/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
18/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
19/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
20/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
21/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
22/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
23/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
24/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
25/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
26/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
27/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
28/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
29/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
30/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
31/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
32/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
33/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
34/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
35/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
36/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
37/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
38/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
39/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
40/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
41/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
42/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
43/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
44/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
45/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
46/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
47/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
48/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
49/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
50/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
51/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
52/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
53/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
54/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
55/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
56/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
57/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
58/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
59/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
60/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
61/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
62/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
63/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
64/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
65/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
66/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
67/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
68/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
69/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
70/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
71/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
72/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
73/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
74/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
75/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
76/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
77/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
78/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
79/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
80/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
81/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
82/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
83/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
84/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
85/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
86/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
87/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
88/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
89/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
90/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
91/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
92/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
93/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
94/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
95/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
96/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
97/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
98/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
99/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
100/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
101/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
102/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
103/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
104/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
105/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
106/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
107/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
108/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
109/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
110/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
111/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
112/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
113/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
114/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
115/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
116/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
117/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
118/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
119/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
120/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
121/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
122/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
123/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
124/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
125/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
126/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
127/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
128/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
129/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
130/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
131/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
132/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
133/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
134/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
135/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
136/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
137/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
138/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
139/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
140/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
141/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
142/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
143/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
144/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
145/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
146/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
147/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
148/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
149/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
150/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
151/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
152/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
153/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
154/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
155/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
156/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
157/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
158/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
159/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
160/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
161/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
162/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
163/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
164/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
165/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
166/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
167/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
168/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
169/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
170/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
171/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
172/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
173/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
174/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
175/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
176/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
177/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
178/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
179/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
180/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
181/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
182/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
183/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
184/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
185/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
186/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
187/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
188/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
189/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
190/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
191/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
192/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
193/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
194/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
195/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
196/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
197/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
198/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
199/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
200/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
201/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
202/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
203/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
204/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
205/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
206/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
207/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
208/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
209/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
210/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
211/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
212/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
213/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
214/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
215/356
214
greater the time taken in production, the more will be the amount of work – in – progress.
Consumables: Consumables are the materials which is necessary for the smooth running
of the manufacturing process. These materials do not directly enter in the production but
they act as catalysts. Generally, consumable stores do not create any supply problem and
form a small part of production cost then also they cannot be ignored. The fuel oil is
indirect but important consumable.
Finished Goods : These are the final products ready to ship. Products when leave work –
in – progress classification enter into the finished goods classification. The stock of
finished goods provides butter between production and market. Maintained inventoryensures proper supply of goods to customers. Concerns, which do not wait for the orders
require more finished goods inventory than that the concern, depend and wait for specific
orders.
Spares : Spares are also a part of inventory. It is different form raw materials,
consumables & finished goods, spares include heavy machinery and also other parts like
belts, bearings, o-rings, baskets, springs, hydraulic pipes, pulleys, gears, worm wheels,
worm shafts, couplings etc. the stocking policies of spares are different from industry to
industry. Some industries like transport will require more spares than the other concerns.
All decisions about spares are based on the financial cost of inventory on spares and the
costs that may arise due to their non-availability.
3. Motive for holding inventory:
Funds remain block in inventories and its storage expenses add into the cost. But at the
same time it is necessary for the smooth running of the production process. In the absence
of inventories a firm will have to make purchases as soon as it receives orders. It will
mean loss of time and delay in execution of orders, which sometimes may cause loss of
customers and business. To over come such cost a firm needs to maintain inventories.
Economists have established three motives for holding inventories, the transaction
-
8/15/2019 Working Capital Mngmnt of Fertiliser
216/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
217/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
218/356
217
volume. This method is quite impractical and costly. The alternate method a rational
approach would be to produce at a uniform rate throughout the year. The inventory will
increase gradually and reach at peak before the season after which the products will start
moving to the market and inventory will decline.
To Prevent loss of Sale : If the customers match the stock of finished goods with the
orders, the changes of loss in sale can be decreased. Orders are executed as it is placed
the need for maintaining the finished goods inventory all wins still greater importance
when the products are competitive. The failure of the company to make such products
available immediately may result in loss of sale of even the loss of customer.
To satisfy other Business Constraints : Business constraints like supplier’s condition ofminimum quantity government regulations, seasonal availability, make the company to
buy quantities more than the current requirements and lock-up its productive capital.
4. Cost and risk of holding inventory
The cost of holding inventory is to be deducted from the product before finding the
amount of net profit. Ability to quantify and develop rigorous models of most managerial problems is dependent on the determination of the behavior of relevant costs, and it is
risky too. The various costs and risks involved in holding inventories are as under.
Cost of Capital: One part of the business fund remains block in holding inventories. The
firm has therefore to arrange for additional funds to meet the cost of inventories. Funds
may be acquired from outsiders or inside the firm. Either funds blocked in holding
inventory is availed form inside sources or from outside sources, the firm incurs a cost. In
case of outside sources in form of interest payable and in case of inside sources in form
of opportunity cost. Thus holding inventory is capital cost as maintaining of inventories
results in blocking of the firms financial resources.
Ordering Costs: Every time an order is placed for stock replenishment certain costs are
involved. Depending upon the type of item, the ordering cost may vary. The cost of
ordering includes.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
219/356
218
Paper work costs, typing, printing and dispatching an order. Carriage costs, telephone, telex and postal expenses. Checking and inspection of received order and handling of the stores costs. The salaries, wages and allowances of purchase staff etc.
Certain costs remain the same regardless of the size of the lot purchased or requisitioned.
A large segment of the total costs of the ordering function are fixed. So it is not correct to
derive the figure by simply dividing the total cost of the ordering operation by the
average number of orders processed.
Storage Costs: Storage cost involves all the costs of holding items in inventory for a
given period of time. The storage costs include. Carrying and handling costs Insurance Taxes The costs of the funds invested in inventories. Obsolescence and deterioration costs.
Carrying and holding costs include the godown costs. If a firm owns the godown , the
opportunity cost adds in storage costs and if a firm does not own the godown, the rent of
godown adds in storage costs. Insurance of the inventory is the another element of caring
cost against losses due to there fire or natural disaster personal property taxes and
business taxes required by local and state governments on the value of its inventories are
payable by a company. The cost of funds invested I inventories is measured by the
required rate of return on these funds.
Stock out Costs : Stock out costs are incurred whenever a business is unable to fill orders
because the demand for an item is greater than the amount currently available in
inventory. Unavailability of inventory fails the company to fulfill its orders in time and it
may result in the immediate loss of profits if customers decide to purchase the product
-
8/15/2019 Working Capital Mngmnt of Fertiliser
220/356
219
from a competitor and in potential long-term losses if customers decide to order from
other companies in the future.
Risk of Price Decline: The risk of decline in the price of holding inventories is always
there. The reasons of decline in price may be increase in market supplies, competition or
general depression in the market.
Risk of Obsolescence : Inventories are valuable only if they can be sold. The inventories
may become obsolete due to improved technology, changes in requirements, change in
customers tastes etc. the existing product becomes levis salable due to such changes.
Risk of Deterioration in Quality : The quality of the materials may also deteriorate
while the inventories are kept in stores. Changes in the physical quality of the inventoriessuch s spoilage and breakage deteriorate the quality of the product.
5. Inventory management
Investment in inventory consists a very big part of the total investment in concerns
specially concerns engaged in manufacturing, wholesale and retail trade. Sometimes theamount invested in inventory is more than in other assets. In India a study of 29 major
industries has revealed that the average cost of materials is 64 paise and the cost of labor
and overheads is 36 paise in a rupee. In some industries about 90 percent part of working
capital is invested in inventories. In such cases the management of inventory becomes
compulsory. It is also necessary for every business unit to give proper attention to
inventory management. Inventory management involves a proper planning of purchasing
handling storing and accounting. An efficient system of inventory management will
determine.
- What to purchase?
- How much to purchase?
- From where to purchase?
- Where to store?
-
8/15/2019 Working Capital Mngmnt of Fertiliser
221/356
220
The inventory management deals with the proper stocking. It means the inventory
management is to keep the stock in such a way that neither there is over stocking nor
under stocking. The over stocking mean decrease in liquidity and wastage of other assets,
on the other hand, under stocking results in delayed supply and decrease in sales and also
may lose customers forever. The investments in inventory should be kept in reasonable
limits.
6. Objectives of inventory management:
The main objects of inventory management are operational and financial. The
operational objectives deal with the material and spares available in sufficient quantity so
that work is not disrupted for want of inventory. While the financial objectives deal with
invested fund in inventories i.e. investments in inventories should not remain idle and
minimum working capital should be locked in it. The following are the objectives of
inventory management.
Continuity of productive operations : To ensure continuous supply of materials
spares and finished goods so that production should not suffer at any time and the
customers demand should also be met. Every attempt should be made to ensure
continuity of productive operations through an uniform flow of materials and eliminatethe possibility of stock-outs.
Maintaining proper stocking: Maintaining proper stocking means to avoid over
stocking and under stocking of inventory. Because both the conditions are unfavorable
for the smooth running of production process and the business.
Effective use of capital : The investment in inventories should be kept at
minimum consistent with the operating sales and financial requirements of the firm. In
short it aims to maintain investments in inventories at the optimum level as required by
the operational and sales activities.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
222/356
221
Cost reduction : Inventory holds a good portion of invested capital. So it becomes
one of the main objects of the inventory management to keep material cost under control
so that they contribute in reducing cost of production and overall costs.
Reduction in administrative workload: Administrative workload on the
purchasing, receiving, inspections, stores, accounts and other related departments should
be berets minimum.
Satisfaction of the customers : Adequate stock of the finished goods should be
maintained to meet customers demand. Satisfaction of the customers ensures the
customers in future and also increase the future or new customers.
Economy in purchasing : To eliminate duplication in ordering or replenishingstock. This is possible with the help of centralizing purchases. The inventory
management enables a firm to gain economy in purchasing through quantity buying and
favorable market.
Reduction of loss: Inventory management aims to minimize losses through
deterioration pilferage, wastage and damages. Inbuilt checks should be provided to weed
out obsolete and non-moving items periodically and automatically.
Practical system: It is inventory management who selects the practical system to
ensure right quality goods at reasonable prices. Suitable quality standards will ensure
proper quality of stock. The price analysis, the cost analysis and value analysis will
ensure payment of proper prices.
Balancing stock and book records : No inventory control system can work if
there are discrepancies between physical stock and book balance. Stock record reconciled
periodically with physical balance. Thus, inventory management ensures perpetual
inventory control so that materials shown in stock ledgers should be actually lying in the
stores.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
223/356
222
Administrative transparency: The management of inventory should be simple,
easy to operate and devoid of tedious calculations. It is to facilitate furnishing of date for
short term, long term planning and control of inventory.
7. Symptoms of poor inventory management:
iv. Odd production with frequent layoffs and overtime working.
v. Inventory investment and sales volume ration is not maintained.
vi. Irregular production to meet sales targets.
vii. Higher down time of the machines due to non availability of spares.
viii. Inflationary market condition shows continuous increase in value of the
obsolescent and dormant stocks.
ix. Machines cant be utilized maximum due to frequent shortage of materials.
x. Frequent receipt of materials increases administrative work.
xi. It also increases transportation charges
xii. Frequent failures in delivery commitments.
xiii. Posting of buyers at the vendor’s plants to expedite supplies.
xiv. Frequent complaints from suppliers regarding revision of schedules placed on
them.
xv. Ultimately poor inventory management results in decrease in profit or loss.
8. Techniques for inventory efficiency
VARIETY REDUCTION: Variety reduction is the voluntary elimination of
unnecessary variety and formulating and applying rules to regulate variety. Management
requires lot of control on items purchased by keeping cheque books locked in strong safes
and has to keep a note of the serial number of the cheques to prevent forgery or misuse.
Rarely attention is paid to what to stock and what not to stock and undue variety causes
leakage of the companies bank balance. Variety reduction includes elimination of
unnecessary variety, control of variety and concentration of effort on selected range of
product.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
224/356
223
Advantages of variety reduction
Decrease in manufacturing cost Variety reduction has the greatest impact on the
production. Diversity of products and components usually entails small production runs
associated with heavy setup costs and visa-versa
Reduction in inventory investment . More variety in stock demands more
investment in inventory. Investment in inventory depends to a greater extent on the
number of items and number in turn can be reduced through variety reduction. The
reduction in inventory investment results firstly due to reduction in reorder quantity and
secondly due to reduction in safely stock.
Savings in purchase cost . Controlled variety purchase ultimately results in saved purchased cost. Standardization of raw materials bought out components and supplies
enables bulk purchases, which is decidedly the easiest way of securing competitive
prices.
Savings in direct labor cost, Lesser variety implies greater expertise of workers
resulting from the need to work on limit machines for longer periods. According to the
theory of learning curve, a worker learns as he works, and the more often he repeats an
operation, the more efficient he becomes; with the result that direct labor cost per unit
declines.”
Better machine utilization, Longer production runs , made possible duet to
reduced variety, result in better machine utilization.
Effective production planning and control. When the range of items is reduced,
production planning and control activities view material control, process planning, tools
control; scheduling, dispatching and progressing get simplified.
Line of Balance ( LOB): The basic problem in a batch production is the control
of work in progress as it is usual practice to let the work proceed in discrete steps, form
one operation to the next, after the work is completed at each stage. Generally, the
-
8/15/2019 Working Capital Mngmnt of Fertiliser
225/356
224
assembly does not start until all parts are completed. The method though tends to
minimize setup cost but greatly influences stocks and capital lack-up due to varying work
content of different components, imbalances in manufacturing times and formation of
queues between the machines. The line of balance technique is evolved to overcome this
difficulty and provide an effective instrument for co-ordination among the key activities
of a large number of departments. Line of balance is a device for planning and
monitoring progress of an order, project or a program by a target date. It facilitates a
control mechanism to establish an orderly flow of batches of materials, components and
sub-assembles through a sequence of unconnected workstations and thereby ensuring that
balanced sets of parts and sub assemblies are available in right quantities of the right
time.
Steps to be followed in LOB technique
An objective chart is prepared Listing of activities and technological relationships. Preparation of a network diagram. Determination of stage lead time. Plan of operation chart is made. Progress chart is made Making of a line-of-balance to determine required progress of work Actual progress of work is recorded. Analyzing performance and taking corrective actions.
SALES FORECASTING : Technologically and administratively modern production
is complex. Not only the basic inputs-men, machines and materials are expensive,
there are usual all sorts of restrictions. Therefore the planning of production activity is
essential so that resources are put to their best use and maximum possible profit is
achieved. Planning tends to meet customers order at the least cost. This can order at
the least cost. Changing the inventory of raw materials can do this. Work – in –
progress and finished goods. They most be made in line with expected future sale i.e.
sales forecast. A large number of activities depend upon projection of future sales.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
226/356
225
The forecasting means the projection based on past data. Past data through is factual
yet rarely it is free form errors. But year for casting is not guesswork. It is an
inference based on large mass of data on past performance. Forecasting is a very
difficult task. Different methods like synthetic for casts, analytical estimates, use of
economic indicators, statically approach, measurement of secular trend are used in
sales for casting.
Sales fore casting is an art. A good fore casting method should be characterized
by simplicity i.e. the method should be simple to use and easy to understand, accuracy i.e.
the method must produce i.e. the method must produce reliable forecasts failing which
the company could land into financial troubles, economy i.e. the cost to generate the
forecast should be as small as possible and stability i.e. the method selected should besuch that expected future changes are kept at minimum.
MATERIAL REQUIREMENT PLANNING (MRP ): Material requirement
planning is the scientific technique for planning the ordering and usage of materials at
various levels of production and for monitoring the stocks during these transactions.
Therefore material requirements planning are both inventory control and scheduling
technique. MRP is based on the concept of independent and dependent demand. The
demand for the products is considered independent since orders may not necessarily
related to others in terms of customers and quantity, but once sales needs are either
known or forecasted, the quantity of raw materials and components required to make
up the products can be calculated depending upon the manufacturing schedules. This
dependent demand condition is served by MRP.
Steps to be followed in MRP technique
Determine the aggregate needs of finished products. Determine the net need of finished products. Develop a master production schedule. Explode the bill of materials and determine gross needs. Screen out B and C category of items.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
227/356
226
Determine the net needs of items. Adjust requirement for scrap allowance. Schedule planned orders. Explode the next level Aggregate needs and determine order quantities. Write and place the planned orders. Maintain the schedules.
JUST IN TIME ( JIT ): Just – in – time approach was first developed by the Toyota
Motor Company in the 1950. JIT inventory management systems are part of a
manufacturing approach that seeks to reduce the company’s operating cycle and
associated costs by eliminating wasteful procedures. JIT inventory systems are basedon the idea that all required inventory items should be supplied to the production
process at exactly the right time and in exactly the right quantities. Therefore JIT is
not just an inventory control or inventory reduction technique, but it is a philosophy
or an approach to productivity that is applicable to all facets of the manufacturing
process including material
JIT approach, when applied systematically facilitates reduction in manufacturing
lead time, defect free production, lower inventory investment, greater conformance to
delivery commitments, lesser cost of production, faster response to market needs, and
improved moral of the work force. The just – in – time approach works best for
companies engaged in repetitive manufacturing operations. A key part of just – in – time
systems is the replacement of production in large batches with a continuous flow of
smaller quantities. The company following JIT system requires close co-ordination
between a company and its suppliers, because any disruption in the flow of parts and
materials from the supplier can result costly production delays and lost sales.
SIMULATION : Many inventory control problems either do not lent themselves to a
mathematical treatment or its analysis is very laborious. To analysis such problems,
simulation is the only answer. Simulation method is relatively simple. It is especially
-
8/15/2019 Working Capital Mngmnt of Fertiliser
228/356
227
useful where uncertainties of data would produce calculations of great and sometimes
of impossible complexity. In simple words simulation is the method of solving
decision making problems by designing, constructing and manipulating a model of a
real system, it is impact the process of experimenting on a model of the real system.
Steps to be followed in simulation:
• Identify input variable, collect data on each variable and present it in event frequency
table.
• Find a cumulative percentage probability distribution in the table.• Assign blocks of tag numbers.• Design work data sheet• Select an appropriate method of generating the required random numbers.• Using the method selected in step – 5 generate “n” random numbers match these to
the block of tag numbers assigned to the events in step – 3 and thereby simulate the
expected value of the events of the input variable.
• Process the simulated data into the form that generates the required information.• Summarize data and interpret results.
COMPUTERISATION OF INVENTORY MANAGEMENT: It is difficultto find a field without computer. The traditional methods do not serve the purpose as
quick availability of data according to the needs cannot be made available. Computers
on the other hand helps in great measure to quickly process the information in
accordance with the needs of the various level of the management. So, the need of
computer cannot be ignored.
Steps in computerization
• Analyze n existing manual system.• Define the objectives of the system• Constitute a project team• Collect data for preliminary system design• Develop a conceptual design
-
8/15/2019 Working Capital Mngmnt of Fertiliser
229/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
230/356
229
Value Volume Analysis : It is somewhat the combination of above two methods.
Value volume analysis determines which inventory accounts should be controlled by the
explosion method and which should be controlled by the past usage method. In value
volume analysis its unit to find the annual activity for the item multiplies the number of
each item used in the past year. This is an important system, because those items with a
high level of activity must be more closely controlled than the ones with relatively low
activity levels. Requirement of high activity level is determined by explosion method
while low activity level requirement is determined by the past usage system.
Determination of Stock Levels : Inventory level on extreme points is detrimental
to the firm. It means it the inventory level is too high it will be unnecessary tic-up ofcapital and if the inventory level is too little, the firm will face frequent stock-outs
involving heavy ordering cost. So optimum inventory level is to be maintain where
inventory costs are minimum and at the same time there is no stock-out which may result
in loss of sale or stoppage of production various stock levels are discussed as such.
Minimum Level: Minimum level represents that smallest quantity of inventory
which have to be maintained in hand at all times. It stocks decrease this minimum level,
the work will stop due to shortage of materials. Minimum stock level is determined on
relying upon the following factors.
Lead Time: Raw material get changed after some process into final product or
salable product and then it is executed. This time taken in processing the order and then
executing it is known as lead-time. It is necessary to maintain some inventory during this
period.
Rate of Consumption : Rate of consumption is the average consumption of
materials in the factory. The rate of consumption will be decided on the basis of past
experience and production plans.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
231/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
232/356
231
Government policies. Sometimes, government fixes the maximum
quantity of materials which a firm can store. Thus the maximum
level is limited by the limit fixed by the government.
Charging fashion and tastes of customer affect the maximum customer
affect the maximum level.
Maximum Stock Level = Replenishment Level + Replenishment Quantity –
( Minimum Consumption * Minimum Replenishment Period )
Danger Level: It is the boundary beyond which materials should not fall in any
case. If the stock crosses the danger level then immediate steps should be taken to re-
order the stocks even if more cost is incurred in arranging the materials. If the materialsare not available immediately there is a possibility of stoppage of work. Formula for the
determination of danger level is
Danger Level = Average Consumption * Maximum Replenishment Period for
emergency purchases.
Average Stock Level: The average stock level is calculated as such.
Average Stock Level = Minimum Stock Level + ½ of Replenishment Quantity
Determination of Safety Stock: Safety stock is a buffer to meet some
unanticipated increase in usage. Requirement of inventory can not be perfectly
forecasted. It may fluctuate over a time period. The demand for material may change and
delivery of inventory may also be delayed and in such situation the firm can face a stock-
out problem. The stock-out affects the smooth running of the process. In order to save a
firm against stock-out crisis due to usage. Fluctuations, firms maintain some margin of
safety stock. The fundamental problem is to decide the quantity stock of safety level.
Two costs are considered in the determination of the safety stock i.e. opportunity cost of
stock-out and the storage costs. Formula for the safety stock is
-
8/15/2019 Working Capital Mngmnt of Fertiliser
233/356
232
Safety Stock = (Maximum Usage Rate – Average Usage Rate ) * Lead Time
Ordering system of Inventory : The basic problem of inventory is to decide the
replenish point. This point indicates when an order should be placed. The following three
things help to determine the replenish point help to determine he replenish point.
Average consumption rate Duration of lead time and Economic order quantity
There are three prevalent systems of ordering and a concern can choose any oneof these
1. Economic Order Quantity System ( EOQ )
2. Fixed Period Order System
3. Single Order and Scheduled delivery System.
Economic Order Quantity (EOQ): There are two basic questions relating
to inventory management.
1. What should be the size of the purchase?
2. At what level should the purchase be made?
The quantity to be purchased should neither be small nor big because costs
of procurement and carrying materials are very high. Economic order quantity is
the size of the lot to be purchased which is economically variable. Economic
order quantity the quantity of materials which can be purchased at minimum
costs. Generally, economic order quantity is the point at which inventory carrying
costs are equal to order costs. There are two major costs associated with any order
quantity procurement cost and inventory carrying cost.
Procurement Costs: These are the costs that are associated with the
purchasing or ordering of materials. These costs include
-
8/15/2019 Working Capital Mngmnt of Fertiliser
234/356
233
- Paper work, costs, typing, printing and dispatching an order.
- Carriage Costs, telephone , telex and postal expenses.
- Checking and inspection of received order and handling the stores costs.
- The salaries, wages and allowances of purchase staff etc.
These costs are known as buying costs and will arise only when some purchases
are made.
The procurement costs or ordering costs are totaled up for the year and then
divided by the number of orders placed each year. The planning commission of India has
estimated these costs between Rs. 10 to Rs. 20 per order.
Carrying Costs : Carrying costs are the costs for holding the inventories. Thesecosts will be incurred if inventories are not carried. These costs include, carrying and
handling costs i.e. the cost of capital invested in inventories. An interest will be paid on
the amount of capital locked-up in inventories, cost of storage, which could have been
used for other purposes, obsolescence, and deterioration cost. The materials may
deteriorate with passage of time. The loss of obsolescence arises when the materials in
stock are not usable because of change in process, insurance cost and taxes, cost of
spoilage in handling of materials. The planning commission of India had estimated these
costs between 15 percent to 20 percent of total costs. The longer the material kept in
stocks, the costlier it becomes by 20 percent every year.
EOQ Model under ideal condition: EOQ Model under ideal condition assumes
that both demand and lead times are constant and known with certainty. Thus, this model
eliminates the need to consider stock outs.
Assumptions
- Annual demand for the item is known.
- Annual demand is stationary throughout the year.
- Seasonal fluctuations are ignored.
- Lead-time is zero for replenishing inventories.
- A firm need not to maintain additional inventories, safety stock etc.
Figure ( a ) Relationship between order size and inventory balance.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
235/356
234
Order Quantity
Average Inventor = Q/2
Q
O
t1 t2 t3
Time
The ideal EOQ Model yields the saw toothed inventory pattern shown in figure -
( a ).- Vertical Lines at the points O, t1, t2, and t3 in time represent the
instantaneous replenishment of the item by the amount of the order
quantity Q.
- The negatively sloped lines between the replenishment points
represent the use the item.
- Average inventory is equal to one-half of the order quantity, ( Q / 2
) because the inventory level varies between O and the order
quantity Q.
- Total carrying cost is equal to carrying cost per unit multiplied by
average inventory [ C(Q / 2) ]
- Total ordering cost is equal to the cost of an order multiplied by
the number of order [ R ( D / Q ) ]
- Total Cost ( TC ) is the sum of Total carrying cost and total
ordering cost.
TC = C ( Q / 2 ) + R ( D / Q )
Where
C = Cost of carrying one unit for a year.
Q = Number of units ordered.
Inventor yLevel
-
8/15/2019 Working Capital Mngmnt of Fertiliser
236/356
235
R = Cost of placing one order.
D = Number of units to be used during a year
TC = Total Cost
EOQ Model : The ordering and carrying costs have an inverse relationship. The
ordering cost goes up with the increase in number of orders placed. On the other hand
carrying costs go down per unit with the increase in number of units, purchased stored. It
is shown in figure ( b ).
Figure ( b ) The EOQ is associated with the lowest total of carrying
cost and ordering cost.
Total Cost
Total
Caring Cost
C
O
S
T
Total
Ordering Cost
EOQ
(Source: Working Capital Management, V.K. Bhalla, Published by Anmol
Publications Pvt. Ltd. New Delhi, Pg – 360)
In figure ( b )
-
8/15/2019 Working Capital Mngmnt of Fertiliser
237/356
236
- vertical axis and horizontal axis represent cost and order quantity
respectively.
- Order quantity increases as we move to the right.
- For very small order quantities the total ordering cost is extremely
high
- As the order size increases total ordering cost declines in
curvilinear fashion.
- Total carrying cost is virtually zero when the orders are small and
frequent. But it increases linearly as the order size and inventory
rise.
- The net effect of these two costs is to cause total cost to decline
over a certain range and then increases.- The EOQ is the order quantity that coincides with the minimum
total cost.
This EOQ Model too has certain assumptions. They
are as follows
- The supply of goods is satisfactory.
- The quantity to be purchased by the concern is certain.
- The prices of goods are stable.
When the above conditions are satisfied, economic
order quantity can be calculated with the help of the following
formula.
EOQ = 2RD/C
Where
R = Cost of Placing one order
D = Number of units to be used during a year
C = Cost of carrying one unit for a year
EOQ = Economic order quantity
-
8/15/2019 Working Capital Mngmnt of Fertiliser
238/356
237
ABC Analysis: One of the most widely accepted concepts of inventory management
is ABC Analysis. The maintaining appropriate control according to the potential
savings associated with a proper level of such control. The ABC Analysis is a means
of categorizing inventoried items into three classes ‘A’, ‘B’, and ‘C’ according to the
potential amount to be controlled.
‘A’ represent the most important items, generally consists of 15 to 25
percent of inventory items and accounts for 60 to 75 percent of annual usage value.
‘B’ represent items of moderate importance generally consists of 20 to 30
percent of inventory items and accounts for 20 to 30 percent of annual usage value.
‘C’ represents items of least significance, generally consists of 40 to 60
percent of inventory items and accounts for 10 to 15 percent of annual usage value. In
addition to annual rupees usage, several factors need to be considered in developingcriteria for classifying items into ‘A’, ‘B’ and ‘C’ categories. In this regard a truth
table can be used to facilitate the classification process. A typical truth table is shown
below. The questions included in such a table and the parameter associated with the
questions, will vary according to the specific inventory being analyzed.
“Truth” Table for ABC Classification
Part numberSr. No. Questions
YesAnswers
1 2 3 4 51. Is annual usage more
than Rs. 10,000 ? A 1 0 0 0 0
2. Is annual usage betweenRs. 1000 and Rs. 10,000?
B 0 1 0 0 0
3. Is annual usage less thanRs. 1,000 ? C 0 0 1 1 1
4. Is the unit cost over Rs.100 ? B 1 0 0 0 0
5. Does the physical natureof the item cause specialstorage problems ?
B 0 0 0 0 1
6. Would a stock out resultin excessive costs ? B 0 0 0 1 0
Classification A B C B B
-
8/15/2019 Working Capital Mngmnt of Fertiliser
239/356
238
In this table six questions are asked regarding each inventory items. A ‘yes’
answer is indicated by one in the appropriate column under the part number, a ‘no’
answer is reflected by a zero. The column next to the question provides the key to the
classification by indicating the inventory class associated with a ‘yes’ answer to each
question. When there is more than one ‘yes’ answer per item, the highest classification is
used. In a typical inventory basic raw materials, such as sheet steel, bar stock etc, and
inventoried sub-assemblies are found in the ‘A’ category. Small metal stamping with
moderate usage are frequently ‘B’ items, while ‘C’ items are typically hardware items
such as small nuts, bolts and screws.
A-B-C analysis helps to decide how much attention should be paid to what items.
More concentration should be given to category ‘A’ items since greatest monitoryadvantage will come by controlling these items. The control of ‘C’ items may be relaxed
and these stocks may be purchased for the year. A little more attention should be given to
category ‘B’ items and their purchase should be undertaken at quarterly or half – yearly
intervals.
An example showing advantages of A-B-C analysis :Suppose three items X,Y,Z
have been used and their consumption is Rs. 1,20,000 Rs, 12, 000 and Rs. 1,200
respectively. Let us presume that A-B-C analysis is not done and annual orders are 12 in
number. Each item will be ordered 4 times and average inventory will be
Item AnnualConsumption(Rs.)
No. of Orders AverageWorkingInventory (Rs.)
X 1,20,000 4 30,000
Y 12,000 4 3,000
Z 1,00 4 300
Total 1,33,000 12 33,300
Suppose A-B-C analysis is followed and number of order will be according to
the importance of the items. If the number of orders are 8, 3 and 1 for items X,Y,Z
respectively then the average inventory will be as follows.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
240/356
239
Item AnnualConsumption(Rs.)
No. of Order AverageWorkingInventory ( Rs. )
X 1,20,000 8 15,000Y 12,000 3 4,000
Z 1,200 1 1200Total 1,33,200 12 20,200
When A-B-C analysis was not followed the average inventory was Rs. 33,300
and after following A-B-C analysis the average inventory came down to Rs. 20,200.
average value of inventory is nearly 1 ½ times in the earlier situation, than as compared
to the second situation.
VED Analysis: The VED analysis is used generally for spare parts. The requirements
and urgency of spare parts is different from that of materials. VED analysis represents
classification of items based on criticality. The analysis classifies the items into three
groups called Vital Essential and Desirable. Vital category includes those items for
want of which production would come to halt. Essential category includes items
whose stock outs cost is very high. And Desirable category include those items which
do not cause any immediate loss of production or their stock out cost is nominal.
VED analysis is carried out for ‘C’ category items. Stock out of which can cause
heavy production loss. An item may be Vital for a number of reasons namely.
• Serious production losses occur.• Lead-time for purchase is very large.• It is non-standard item and is purchased to buyers design.• The sources of supply are only one and are located far off from the
buyers plant.
ABC and VED classification can be combined to advantage.
XYZ Analysis: XYZ analysis is based on value of the stocks on hand i.e. inventory
investment. Items whose inventory value are high are called X items white those
whose inventory values are low are called Z items. And Y items are those that have
-
8/15/2019 Working Capital Mngmnt of Fertiliser
241/356
240
moderate inventory stocks. Usually X-Y-Z analysis is used in conjunction with ABC
analysis. XYZ analysis when combined with ABC analysis is used as follows:
Class of items A B C
X
Efforts to be
made reducestocks to Zcategory
Efforts to be
made to convertsthem to Ycategory
Steps to be taken
to dispose offsurplus stocks.
Y
Efforts to bemade convertthese to Zcategory
Control may befurther tightened
Z Stock levels may
be received twicea year
HML Analysis: The HML classification is similar to ABC classification, but in this
case instead of the assumption value of item, the unit value of the item is considered.
The items under analysis are classified into three groups that are called ‘High’,
‘Medium’ and ‘Low’. For classification, the items are listed in the descending order
of their unit price. By the management it is cut-off into three groups. For example, the
management may decide that all items of unit price about Rs. &00 will be ‘H’
category, those with unit price between Rs. 100 to &00 will be of ‘M’ category andthose having unit price below Rs. 100 will be of ‘1’ category.
- Fixes the storage and security requirements.
- Controls consumption at the departmental head level.
- Decides the frequency of stock verification.
- Controls purchases according to the levels.
- Delegate authorities to different buyers to make petty cash
purchase.
SDE Analysis: It should not be over locked that inventory levels are also dependent
on the source a scare item with a long lead time will have a higher safety stock for the
same consumption level. The SDE analysis is the system where classification is done
on the basis of general availability and the source of suppliers.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
242/356
241
SED analysis is based on the following procurement problems.
- non-availability
- Scarcity
- Longer lead time
- Geographical location of suppliers and
- Reliability of suppliers
SDE indicates three groups named ‘Scare’, ‘Difficult’ and ‘Easy’ .
‘Scare’ classification includes of items, which are in short supply, imported or
canalized through government agencies. Such items are best to procure once a year.
‘Difficult’ classification includes of items, which are available indigenously butare not easy to procure. Also items from long distance and for which reliable sources do
not exist fall in to this category. Suppliers of such items require several months of
advance notice. ‘Easy’ classification comprises of items, which are reality available.
Items produced locally and where supply exceeds demand fall into this group.
The purchase department to decide on the method of buying and to fix
responsibility of buyers employs SDE analysis.
G-NG-LF / GOLF Analysis:
G-NG-LF / GOLF analysis is system where classification is done on the basis of
general availability and the source of suppliers. This analysis like SDE analysis based on
the nature of the suppliers which determine quality, lead time, terms of payment,
continuity or otherwise of supply and administrative work involved. The four groups
classified by the G-NG-LF analysis are
‘G’ group covers items procured form government suppliers such as the STC, the
MMTC and the public sector undertakings.
‘NG’ (O in GOLF analysis) covers items procured from Non-government (or
Ordinary) suppliers.
‘L’ group covers items bought form local suppliers.
‘F’ group contain those items which purchased from foreign suppliers.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
243/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
244/356
243
Inventory Turnover Rations: Inventory turnover ratios are calculated to ensure an
efficient use of inventories. An efficient use of inventor ensures the minimum funds
requirement and blocking of minimum funds in inventory. The inventory turnover
ration is also known as stock velocity. It is calculated as sales divided by average
inventory or cost of goods sold divided by average inventory cost. Inventory
conversion period may also be calculated to find the average time taken for clearing
the stocks. In mathematical expression.
Inventory Turnover Ratio:
= Cost of Goods Sold / Average Inventory at Cost
= Net Sales / Average Inventory
Inventory Conversion Period :
= Days in a year / Inventory Turnover Ratio
(3) Aging Schedule of Inventories
Aging Schedule of Inventories
Item Name /Code
AgeClassification
Date ofAcquisition
Amount Rs. % age toTotal
001 0-15 days June 25,2000 30,000 15
002 16-30 days June 10, 2000 60,000 30
003 31-45 days May 20, 2000 50,000 25
004 46-60 days May 5,2000 40,000 20
005 61 and above April 12,2000 20,000 10
Classification of inventories according to the period ( age ) of their holding
helps in identifying slow moving inventories thereby helping in effective control and
management of inventories. Aging inventory of a firm is shown in above table.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
245/356
244
Classification and codification of inventory: Inventory includes raw
material, work – in – progress, finished goods, consumable, spares etc. all these
items again can be classified in sub-classes. The raw materials used may be of 3-4
types, finished goods may also be of more than one type, spares may be of a
number of types and so on. The proper classification is essential for proper
recording and control. Classified inventories are given numbers or code for the
separate identification of each item. Lack of proper classification also loads to
reduction in production. The inventories can be grouped either according to their
nature or according to their use. Generally materials are grouped according to
their nature such as construction materials consumable stocks, spare lubricants
etc. After the grouping of the materials, they are given codes. Such coding may be
done alphabetically or numerically. Generally latter method is used for coding. Innumerical method two or three digits numbers are assigned to the category of
material in that class. In the same class to show different quality decimals are
used for example, a firm has two categories of items divided into 15 groups. In
main category and subcategory two numbers will be used and then decimals will
be used to the quality etc. if mobile oil is to be coded, two digits will be used in
the category i.e. lubricant oil say 13, two digits will be used for mobile oil say 65
and one digit may be used after decimal for the quality of mobile oil say 2. The
code of mobile oil will be 1365.2 . The classification and codification of
inventories enables the introduction of mechanized accounting. Secrecy of
description also can be maintained. It also helps the prompt issue of stores.
Inventory Reports: An effective inventory control is possible only when
management is well informed about the latest stock position of different items.
Usually preparing periodical reports can do it. Such reports should include all
necessary information for managerial action. On the basis of these reports
management takes corrective action whenever necessary. Regularly made reports
make management clear about the conditions and show proper way to which it
should be stepped.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
246/356
245
Valuation of Inventories: The value of materials has a direct effect on the
income of a firm, so it is necessary that a pricing material method should be such
that it gives a realistic value of stock. In determining valuation method to use,
consideration is given to the size and turnover of inventories, the price outlook,
tax laws and prevailing practices in the market. While the expert in different areas
play important roles in evaluating the implication of different procedures from the
viewpoint of their specialties, the financial managers influence will be felt
particularly in establishing underlying policies. The balance sheet and the
income statement both are affected significantly by the evaluation of inventory.
Initially, the inventory valuation influences the current assets, the total assets, the
ratio between current assets and current liabilities and the retained earnings. In the
later the inventory evaluation may influence the cost of goods sold and the net profits. “Cost price or market price whichever is less” is the traditional method of
valuation of material and is no longer the only method. Different methods value
different closing values and it leaves a scope for window dressing. It management
is interested to show les profits then it can select such a method which will show
less sock or vice-versa. To safeguard public interest the Government of India has
instituted statutory controls to prevent frequent change of material valuation
methods. A firm will have to use a particular valuation method for at least three
years and any changes there from must be approved by the Board.
Following are the methods for pricing materials. :
AVERAGE COST METHOD : Cost of an individual item has no
significance. There is no any prescribed method to be followed for the valuation
of the inventory. For determining the valuation of inventories, consistency from
year to year is of prime importance and for this using average costs rather than
specifically identified. In averaging the entire group of items is considered as
single entity and when particular items are separated they are treated as merely a
appropriate part of the whole. In average cost method of pricing all materials in
-
8/15/2019 Working Capital Mngmnt of Fertiliser
247/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
248/356
-
8/15/2019 Working Capital Mngmnt of Fertiliser
249/356
248
matched with current income. This method shows low profits because of
increased charge to production and closing stock figures will also be low as they
will be valued at earlier prices. The taxable liability will also be low thus enabling
the concern to retain more money in the business.
STANDARD PRICE METHOD: In standard price method price of materials are
fixed in advance depending upon market conditions, usages rate, handling facilities,
storage facilities etc. price of these materials are considered standard irrespective of its
actual price or purchase price. For example materials is fixed at Rs. 6 per unit. Two lots
of materials of 12000 units and 15000 units were purchased at Rs. 5.42 and Rs. 6.20 per
unit. Every issue of materials will be priced at Rs. Per unit, without taking into
consideration the prices at which these were purchased. The cost price of materials andthe price charged to production differs from each other. The difference between these two
prices will be transferred to “Purchase Price Variance Account”. The standard price
charged determines the profits or loss incurred from issue of materials.
MARKET PRICE METHOD: In market price method the prices charged to
production are determined depending upon the latest market prices. The market prices
may either be replacement prices or realizable prices. For the materials kept in stock for
use in production, the replacement prices are used while realizable prices are used for the
goods kept for resale. Here also the actual purchase price of material differs the price of
issued material. Every issue is made at the replacement price of that day. At it reflects the
latest price charged to production, it is to check on the efficiency of the purchasing
department.
It is not easy to follow market price policy as it becomes difficult to select the
market price because; different prices prevail in different markets. There may a chance of
selecting the method blazed by human. The charging of more or less prices than the price
actually paid will bring in the element of profit or loss that is unnecessary.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
250/356
249
13. ANALYSES AND INTERPRETATION OF DATA:
The table no 6.1 shows the numerical data of sales amount, stock, stock turnover
ratio, stock turnover ratio index and trend value of GNVFC from the period 1996-’97 to
2004-’05. It also calculates the chi-square value, standard deviation and co-efficient of
variation for the same.
Stock turnover ratio means, “The ratio of sales amount to stock”. It comes out to
6.14 for the base year i.e. 1996-97. Then, it decreases continuously for three years and
goes down to 5.09 in the year 1999-00. Then, it starts the increasing trend from the year
2000-01 and reaches to 8.27 in the year 2003-04, which is the highest level during the
research period. Then, it decreases in the year 2004-05 and goes down to 6.99. The
average stock turnover ratio comes out to 6.17, which is higher than base year ratio. It
clears that liquid position of the company is maintained during the study period.
The stock turnover ratio index is assumed 100 for the base year i.e. 1996-’97. The
stock turnover ratio index clears the picture about the variation in stock turnover ratio. It
decreases constantly for three years and goes down to 82.88 in the year 1999-’00. Then, it
increases continuously for four years and reaches to 134.60 in the year 2003-’04. Then, inthe last year of the study period, it decreases to 113.80. So, in the end, it indicates the
decreasing trend. The stock turnover ratio index comes on an average to 100.38 that is
higher than the base year ratio. It points out the positive trend. The trend value of stock
turnover ratio shows an overall upward trend.
Here, the calculated value of chi-square comes out to 10.94. On the other hand,
the critical value is 7.815. So, the calculated value is higher than the critical value. It
means that the null hypothesis is rejected and alternative hypothesis is accepted. It means,
“There is a significant difference in the stock turn-over ratio of the company”. Here, the
standard deviation works out to 14.88 while the co-efficient of variation comes out to
14.82. So, there is no much variation in the productive indices.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
251/356
250
Table No. - 6.1 Stock Turn over Ratio of GNVFC (Rs. In Crore)
Year Sales Stock STR index T.V.
1996-97 1171.96 190.81 6.14 100.00 85.01
1997-98 1162.01 210.38 5.52 89.93 88.851998-99 1099.29 199.16 5.52 89.87 92.69
1999-2000 1153.06 226.51 5.09 82.88 96.54
2000-01 1339.39 243.10 5.51 89.70 100.38
2001-02 1404.79 225.77 6.22 101.31 104.23
2001-03 1377.32 221.25 6.23 101.35 108.07
2003-04 1446.84 175.01 8.27 134.60 111.91
2004-05 1822.62 260.75 6.99 113.80 115.76total 11977.28 1952.74 55.49 903.44 903.44
average 1330.81 216.97 6.17 100.38 100.38
Chi Square : 10.94
SD : 14.88
CV :14.82
The table no 6.2 provides the statistical data of sales amount, stock, stock turnover
ratio, stock turnover ratio index and trend value of GSFC from the period 1996-97 to
2004-05. It also computes the chi-square value, standard deviation and co-efficient of
variation for the same.
Stock turnover ratio means, “The ratio of sales amount to stock”. It works out to
3.23 for the base year i.e. 1996-97. Then, it increases in the first two initial years and
reaches to 4.35 in the year 1998-’99. Then, it decreases to 3.65 in the year 1999-’00.
Then again, it increases to 4.16 in the year 2000-’01. Then again it decreases to 4.03.
Then it increases constantly for three years and goes up to 6.79 in the year 2004-05. The
average stock turnover ratio comes out to 4.48, which is higher than the base year ratio. It
shows that the liquid position of the company is maintained during the study period.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
252/356
251
Now, the stock turnover ratio index is assumed 100 for the base year i.e. 1996-97.
The stock turnover ratio index gives the picture about the variation in stock turnover
ratio. It increases in the first two initial years and goes up to 134.55 in the year 1998-99.
Then, it decreases for one year and goes down to 112.91 in the year 1999-00. Then, it
increases to 128.53 in the year 2000-01. Then again, it decreases to 124.69. Then after it
increases constantly for three years and reaches to 209.96 in the year 2004-05 which the
highest level during the study period. The stock turnover ratio index comes on an average
to 138.48, which is higher than the base year ratio. It indicates the positive trend. The
trend value of stock turnover ratio shows an overall upward trend.
Here, the calculated value of chi-square comes out to 19.09 while the critical
value comes out to 7.815. So, the calculated value is higher than the critical value. It
means that the null hypothesis is rejected and alternative hypothesis is accepted. It means,“There is a significant difference in the stock turn-over ratio of the company”. Here, the
standard deviation comes out to 31.75 while the co-efficient of variation works out to
22.93. So, there is a variation in the productive indices.
Table No. - 6.2 Stock Turn over Ratio of GSFC (Rs. In Crore)
Year sales Stock STR index T.V.1996-97 1760.10 544.27 3.23 100.00 97.651997-98 1879.64 471.86 3.98 123.18 107.86
1998-99 1886.41 433.55 4.35 134.55 118.071999-2000 1961.27 537.14 3.65 112.91 128.272000-01 2051.00 493.43 4.16 128.53 138.482001-02 1954.88 484.81 4.03 124.69 148.682001-03 1840.39 412.13 4.47 138.09 158.892003-04 2102.49 372.81 5.64 174.39 169.092004-05 2604.87 383.64 6.79 209.96 179.30total 18041.05 4133.64 40.30 1246.30 1246.30average 2004.56 459.29 4.48 138.48 138.48
Chi squ : 19.09
SD : 31.75
CV : 22.92
The table 6.3 displays the mathematical data of sales amount, stock, stock
turnover ratio, stock turnover ratio index and trend value of Liberty Phosphate Ltd. from
the period 1996-97 to 2004-05. It also calculates the chi-square value, standard deviation
and co-efficient of variation for the same.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
253/356
252
Stock turnover ratio can be defined as “The ratio of sales amount to stock”. It
comes out to 3.67 for the year 1996-97 i.e. base years. It starts the increasing trend from
the initial years. It increases constantly for five years. It increases high from 3.67 in the
year 1996-97 to 11.03 in the year 2001-02. Then, it decreases to 5.77 in the year 2002-03.
Then again, it increases and goes up to 8.45 in the year 2004-05. The average stock
turnover ratio comes out to 6.29, which is higher than the base year ratio. It interprets that
the liquid position of the company is maintained during the research period.
Then, stock turnover ratio index is assumed 100 for the base year i.e. 1996-’97.
The stock turnover ratio index gives the idea about the variation in stock turnover ratio. It
also increases continuously for five years same as stock turnover ratio. It increases highfrom 100.00 in the year 1996-97 to 300.38 in the year 2001-02. This is the highest level
during the study period. Then, it decreases and goes down to 157.17 in the year 2002-03.
Then, again it increases and reaches to 230.00 in the year 2004-05. So, it indicates that
the company has made essential improvement in the last three years. The stock turnover
ratio index comes on an average to 171.23, which is higher than the base year ratio. It
points out the positive trend. The trend value also indicates the upward trend.
Here, the calculated value of chi-square comes out to 103.64 while the critical
value comes out to 7.815. So, the calculated value is higher than the critical value. It
means that the null hypothesis is rejected and alternative hypothesis is accepted. It means,
“There is a significant difference in the stock turn-over ratio of the company”. Here, the
standard deviation comes out to 63.33 while the co-efficient of variation works out to
36.98. So, it indicates that there is much variation in the productive indices.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
254/356
253
Table No. - 6.3 Stock Turn over Ratio of Liberty (Rs. In Crore)
Year Sales Stock STR index T.V.1996-97 41.43 11.28 3.67 100.00 104.26
1997-98 47.56 12.38 3.84 104.60 121.001998-99 52.22 13.03 4.01 109.12 137.751999-2000 67.32 12.57 5.36 145.82 154.492000-01 83.56 10.76 7.77 211.44 171.232001-02 70.94 6.43 11.03 300.38 187.982001-03 66.73 11.56 5.77 157.17 204.722003-04 78.87 11.76 6.71 182.60 221.472004-05 74.17 8.78 8.45 230.00 238.21total 582.80 98.55 56.60 1541.11 1541.11average 64.76 10.95 6.29 171.23 171.23
Chi-Squ : 103.64SD : 63.33
CV : 36.98
The table no.6.4 gives the numerical data of sales amount, stock, stock turnover
ratio, stock turn-over ratio index and trend value in reference to IFFCO from the period
1996-97 to 2004-05. It also computes the chi-square value, standard deviation and co-
efficient of variation for the same.
Stock turnover ratio means, “The ratio of sales amount to stock”. It comes out to
3.60 for the year 1996-97 i.e. the base year. It increases in the first initial year and
reaches to 4.69 in the year 1997-98. Then, it decreases for two years and goes down to
4.32 in the year 1999-00. This is the lowest level during the study period. Then, it
increases to 5.64 in the year 2000-01. Then again, it decreases to 4.87 in the year 2001-
02. Then it increase constantly for three years and reaches to 7.76 in the year 2004-05.
This is the highest level during the study period. So, it can be said that from the year
1996-97 to 2001-02 it moves in a mixed trend but in the last period it moves in a
increasing trend. The average stock turnover ratio works out to 5.16, which is higher than
the base year ratio. It clears that the liquid position of the company is maintained during
the course period.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
255/356
254
Now, stock turnover ratio index is assumed 100 for the base year i.e. 1996-97.
Stock turnover ratio index clarifies the picture about the variation in stock turnover ratio.
It increases in the first initial year and reaches to 130.40. Then, it decreases for two years
and goes down to 120.12 in the year 1999-00, which is the lowest level during the study
period. Then again, it increases to 156.82 in the year 2000-01. Then, it decreases to
135.26 in the year 2001-02. Then after it increases constantly for three years. It increases
from 135.26 in the year 2001-02 to 215.59 in the year 2004-05. It indicates the positive
trend during the study period. The trend value also shows the upward trend.
Here, the calculated value of chi-square comes out to 15.24 while the critical
value of chi-square works out to 7.815. So, the calculated value is higher than the critical
value. It means that the null hypothesis is rejected and alternative hypothesis is accepted.It means. There is a significant difference in the stock turn-over ratio of the company”.
Moreover, the standard deviation comes out to 31.37 while the co-efficient of variation
works out to 21.88. So, it indicates that there is much variation in the productive indices.
Table No. - 6.4 Stock Turn over Ratio of IFFCO (Rs. In Crore)
Year Amount Stock STR index T.V.1996-97 2266.08 629.95 3.60 100.00 101.801997-98 3617.83 771.27 4.69 130.40 112.19
1998-99 4047.83 921.84 4.39 122.07 122.591999-2000 4806.79 1112.44 4.32 120.12 132.982000-01 5426.93 961.99 5.64 156.82 143.372001-02 5094.08 1046.92 4.87 135.26 153.772001-03 6091.14 1137.53 5.35 148.86 164.162003-04 5919.57 1020.56 5.80 161.24 174.552004-05 7224.03 931.51 7.76 215.59 184.95total 44494.28 8534.01 46.42 1290.36 1290.36average 4943.81 948.22 5.16 143.37 143.37
Chi-Squ : 15.24
SD : 31.37
CV : 21.87
The table no. 6.5 displays the mathematical data of Current Assets, stock
(inventory), Inventory to Current Assets ratio, Inventory to Current Assets ratio index and
-
8/15/2019 Working Capital Mngmnt of Fertiliser
256/356
255
trend value in reference to GNVFC from the period 1996-’97 to 2004-’05 i.e. nine years.
It also computes and shows the chi-square value, standard deviation and co-efficient of
variation for the same.
Percentage of Inventory to Current Assets ratio means, “The ratio of stock to
Current Assets”. It comes out to 33.22 for the year 1996-97 i.e. base year. Then, it
decreases in the two initial years and goes down to 27.19 in the year 1998-99. Then, it
increases for constant two years but no so significantly and reaches to 28.56 in the year
2000-01. Then again, it decreases and goes down to 18.37 in the year 2003-04, which is
the lowest level during the study period. Then after in the year 2004-05, it increases to
22.59. The average Inventory to Current Assets ratio comes out to 26.94, which is lower
than the base year ratio. So, the capital is not engaged so much in the inventory incomparison to the total current assets. It clears that the inventory management has
improved in the company.
Now, Inventory to Current Assets ratio index is assumed 100 for the base year i.e.
1996-97. So far the analytical point of view is concerned, Inventory to Current Assets
ratio index gives an idea about the variation in Inventory to Current Assets ratio. It
decreases in the first initial two years and goes down to 81.83 in the year 1998-’99. Then,
it increases for two years continuously and goes up to 85.96 in the year 2000-’01. So, it
recovers but not so significantly. Then again, it decreases for three years constantly and
goes down to 55.29 in the year 2003-04 which is the lowest level during the courts
period. Then after in the year 2004-05, it increases to 67.99. So, the company has tried to
recover in the last year. Inventory to Current Assets ratio index comes on an average to
81.10 that are lower than the base year ratio. It points out the negative trend during the
course period. The trend value also indicates the upward trend.
Here, the calculated value of chi-square works out to 5.05. On the other hand, the
critical value of chi-square is 7.815. So, the calculated value of chi-square is lower than
the critical value. It interprets that the null hypothesis is accepted. It means, “There is no
significant difference in the Inventory to Current Assets ratio of the company”.
-
8/15/2019 Working Capital Mngmnt of Fertiliser
257/356
256
Moreover, the standard deviation comes out to 12.49 while the co-efficient of variation
works out to 15.40. So, there is much variation in the productive indices.
Table No. - 6.5